Net Present Value Method
The following data are accumulated by Reynolds Company in evaluating the purchase of $121,300 of equipment, having a four-year useful life:
|Net Income||Net Cash Flow|
|Present Value of $1 at Compound Interest|
a. Assuming that the desired rate of return is 15%, determine the net present value for the proposal. Use the table of the present value of $1 presented above. If required, round to the nearest dollar.
|Present value of net cash flow||$|
|Less amount to be invested||$|
|Net present value||$|
b. Would management be likely to look with
favor on the proposal?
The net present value indicates that the return on the proposal is (choose one: greater, less) than the minimum desired rate of return of 15%.
a. Desired rate of return =15%
Calculation of present values of the cash inflows :
Yr1 - 72000*.870 = $62640
Yr2 - 55000*.756 = $41580
Yr 3- 42000*.658 = $27636
Yr 4 - 28000*.572 = $16016
Total = $147872
Amount invested = $121300
Net present value = $26572
b. Yes the management is likely to look with favor on the proposal since the NPV is positive , which means that the return on the proposal is higher than the minimum desired rate of 15%
Looking forward to your upvote. Thanks!!
Get Answers For Free
Most questions answered within 1 hours.